Convertibles as backdoor equity financing o Delayed equity Convertibles provide a way of selling common stock at a price above the existing market They are employed as deferred common stock financing o The call feature is important since it gives the company the means to shift debt to equity o Issuance of convertibles offers a means to control the debt/equity ratio Convertible bonds
Slide: 11 Delayed equity • Convertibles provide a way of selling common stock at a price above the existing market. • They are employed as deferred common stock financing. The call feature is important since it gives the company the means to shift debt to equity. Issuance of convertibles offers a means to control the debt/equity ratio. Convertible bonds
Call protection ⊙Hard( or absolute) To protect the bond from being called for a certain period of time o Soft (or provisional The issuer is allowed to call only when certain conditions are satisfied Convertible bonds
Slide: 12 Hard (or absolute): To protect the bond from being called for a certain period of time. Soft (or provisional): The issuer is allowed to call only when certain conditions are satisfied. Convertible bonds
Role of call protection o To preserve the value of the equity option for the bondholders o While waiting for the stock price to increase, convertibles typically provide more income than the stock. Without the call protection, this income stream could be called away at any time o Hard call protection with the longest possible duration is the most desirable for the investors Convertible bonds
Slide: 13 To preserve the value of the equity option for the bondholders. While waiting for the stock price to increase, convertibles typically provide more income than the stock. Without the call protection, this income stream could be called away at any time. Hard call protection with the longest possible duration is the most desirable for the investors. Convertible bonds
Example: Bank of East Asia US$250.000.000 2.00 percent Convertible Bonds due 2003 Issue date July19,1996 Issue price 100 percent of the principal amount of the Bonds, plus accrued interest, if any, from July 19, 1996(in denominations of US$1,000 each) Conversion period From and including September 19, 1996 up to and including July 7, 2003 Convertible bonds
Slide: 14 US$250,000,000 2.00 percent Convertible Bonds due 2003 Issue date July 19, 1996 Issue price 100 percent of the principal amount of the Bonds, plus accrued interest, if any, from July 19, 1996 (in denominations of US$1,000 each) Conversion period From and including September 19, 1996 up to and including July 7, 2003 Convertible bonds
Example: Bank of East Asia(cont'dy Conversion feature Conversion price HKS31.40 per Share and with a fixed rate of exchange on conversion of HK$7.7405 US$1.00 Dilution protection The Conversion Price will be subject to cl ause adjustment for, among other things subdivision or consolidation of the shares bonus issues, right issues and other dilutive events Convertible bonds
Slide: 15 Conversion feature HK$31.40 per Share and with a fixed rate of exchange on conversion of HK$7.7405 = US$1.00. The Conversion Price will be subject to adjustment for, among other things, subdivision or consolidation of the Shares, bonus issues, right issues and other dilutive events. Conversion price Dilution protection clause Convertible bonds